Editor’s note from Blomquist: This is the first part of a two-part series on how real estate investors are preparing for another potential downturn, or doomsday, in the housing market in the future. The first part establishes the shifting market sands that investors are experiencing in various markets across the country.
The second part in our July issue will provide a deeper dive into emerging opportunities, practical acquisition and exit strategies that investors can employ in this shifting market.
Leland DiMeco is making hay while the sun shines in the Boston real estate market.
But he knows that at some point in the not-too-distant future, a real estate winter is coming that will cool off the city’s still red-hot housing market.
Some of DiMeco’s clients are getting priced out of the picked-over parts of the city and are starting to look for emerging neighborhoods where they can add value through rehab and then profit off an eventual flip.
Finding deals in a foreclosure drought
While Boston has seen a recent surge in foreclosure starts, with 15 consecutive months of annual increases, foreclosures have largely dried up in Southern California, according to RealtyTrac data.
Overall foreclosure activity has been down on an annual basis in the Los Angeles metro area in nine of the last 12 months, and in May the metro area’s foreclosure rate ranked 110th out of the 214 metro areas tracked by RealtyTrac each month.
The resulting dearth of distressed properties along with hesitant homebuilders has led to a market that is still hallmarked by short supply despite the recent boom, according to Bruce Norris, founder of The Norris Group, a Southern California company that invests in real estate and also trains and lends money to real estate investors. Norris predicted the 2006 housing bubble burst in his report, “The California Crash.”
Investors squeezed in Orange County
Mark Hughes, chief operating officer at First Team Real Estate, one of the largest brokerages in Southern California, said he’s hearing more investors thinking about moving on.
“As institutional and small mom-and-pop investors try to gauge the top of the market, indications are that a growing number of them feel that after riding the wave up on the rebound, now is the time to divest and reallocate,” he said. “The chatter is growing louder and many think we are starting to price peak and will soon see an increase in inventory coming in the next few months coupled with possible rate hikes, both of which would tamp down continued rapid price growth.”
Strength, then weakness
The Southern California market — along with other markets across the country — may get stronger before they get weaker, according to Robert Campbell, a real estate analyst and author of “Timing the Real Estate Market.” Despite the possibility of short-term strength, however, Campbell said he’s still advising investors to pull back on their purchases.
Campbell said some markets are still strengthening in large part thanks to an influx of foreign buyers willing to pay more than local buyers constrained by local household incomes. He believes the international influence could possibly push up California prices another 50 percent in the short term, but he cautioned that the forces driving that international influx are bigger economic dominoes that could eventually result in another U.S. housing crash.
While international investors and other cash buyers driving up prices won’t likely result in another foreclosure crisis like that spawned by the last housing crash, the cash-buyer spigot can quickly shut down once perceptions of the market change, according to Jason Medley, a Tampa, Florida-based investor who also runs a “mastermind” of high-powered investors from across the country called The Collective Genius.
“I’m 43 years old,” he said. “The first time the crash happened, I was a victim. The next time it happens, I want to play ball.”
Daren Blomquist is the vice president of RealtyTrac.
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